Chain transactions - BMF letter dated 25 April 2023

The BMF (German Federal Ministry of Finance) had already presented a first draft of its letter regarding chain transactions back on 22 June 2022 (as we reported here). It now issued a final version on 25 April 2023. There are only a few differences between the two versions. Here, we summarise the key statements regarding the problematic issues.

Assignment of the transport

As is well known, the supply with the goods´movement is ascribed based on who initiates the transport. To ascribe the transport to a party in a chain supply, the party must either transport the goods itself or, in principle, commission a transport company to handle this. This fact must be clear and easily verifiable from the records. If the party involved has not given the transport order, the initiation of transport can still be ascribed to it if it can prove that the transport is for its accounts and bears the actual risk of accidental loss during the transport. This aligns with the previous version of the BMF letter, meaning that entrepreneurs continue to be faced with the difficult question under civil law of who bears what risks and at what point. If, in addition, Incoterms are used incorrectly or inconsistently, or if foreign civil law also plays a role, it becomes very confusing and, in reality, almost impossible to manage.

Allocating the supply with the transport when transport is initiated by an intermediary trader

If the goods are transported or dispatched by an intermediary, it is rebuttably presumed that the supply to him/her is the supply with the transport. If an intermediary wants to ascribe the movement of goods to their own supply, it must prove this. If the supply is between two EU Member States, proof is deemed to have been provided if the intermediary, when dealing with its upstream supplier, uses the VAT ID issued by the country in which the transport commenced. As also stated in the draft dated June 2022, the VAT ID must be used before the transport commences because there is, in principle, still no provision for its retroactive use (see below for restriction).

Use of the VAT ID by the intermediary

While Art. 36a of the VAT Directive requires the intermediary to communicate the VAT ID to its supplier, § 3 para. 6a of the UStG (German VAT Code) uses the term "use".

Whether "communicate" and "use" are two different things has since been the subject of heated debate. In the final version of the BMF letter, the difficult reference to section 3a.2, paragraph 10, sentences 2 to 6 of the UStAE (Administrative guidelines to the German VAT Code) on the use of a VAT ID has been eliminated. For the requirements, some of the wording was retained and other wording was eliminated. The BMF has now firmly stated the following:

Use of the VAT ID requires deliberate action. As before, including a VAT ID on a letterhead or a credit note form of the recipient is not sufficient.
As a rule, the VAT ID must be used when the contract is concluded, at the latest, however, when the supply is performed. The wording "as a rule" greatly weakens this requirement, so that the tax offices cannot actually insist on it in practice.
Inclusion of the VAT ID shall be clearly shown in the respective order document. The "shall" also makes this requirement very weak, meaning that it is somewhat less relevant in practical terms.
Changing the use of the VAT ID later is not possible.
If the order is placed verbally, it is important to document that the VAT ID was used on time.
It is sufficient for the intermediary to document that they have notified their upstream supplier that they plan to use the VAT ID issued by the country of departure for all future supplies. The draft letter contained a reference to para. 3a. 2 para. 10 of the UStAE which stated that the upstream supplier must accept this declaration by the intermediary and the VAT ID requested for this purpose when entering the master data for the first time. This complicated and unnecessary requirement has been eliminated.
An alternative form of deliberate action remains: It is also considered a deliberate action by the intermediary if its customer formally declared its entrepreneurial status and the entrepreneurial purchase of the goods in an objectively verifiable manner and has correctly declared its purchase (i.e., as an intra-Community acquisition). In addition, the intermediary must fulfil its obligation to submit the EC sales list and indicate the VAT ID of the customer there as well as on the invoice. This should probably be interpreted to mean that in this case the intermediary’s use of the VAT ID of the country of departure before the start of the transport can be waived. The practical result is a considerable simplification that still allows for the (actually prohibited) subsequent rectification. It is not entirely clear, however, how this simplification relates to the statement that subsequent changes to the VAT ID will continue to not have any effect. Presumably, this can be interpreted to mean that once a VAT ID not corresponding to the country of departure has been used, the transport of the supply can thereafter never be attributed to the intermediary. Only if the intermediary has not used a VAT ID is it still possible to subsequently allocate the transport to its supply as described.

Dated: 16 May 2023